Hold Steady for the Trump Bounce

Tom Clinch

Whatever your views on the return of Donald Trump to the White House, there is no getting away from the fact that his policy choices and the future of his big tech backers in the USA are the biggest factors influencing markets right now. They are all expecting a Trump bounce in the markets, but it could be more of a rollercoaster.

The difficulty with Trump is that despite his promises of major change, nobody knows what he is really going to do. This was also the week that the US tech titans were upstaged by the Chinese AI minnow, DeepSeek. We are entering an age of radical uncertainty.

So, how do you position your investment strategy for this very uncertain environment? Our investment committee had its first meeting with our new member Leona Nicholson in January, and we debated these issues at length. Leona is steeped in the world of investing, and she presented a detailed agenda on the current state of the markets for us to consider.

The consensus of the committee was that bonds offer good value at current yields, and the gradual lowering of interest rates in Europe should support the kind of solid but unspectacular gains that we traditionally expect from this low-risk asset class.

Commercial property cannot be forgotten as an asset class, despite two years in the doldrums. Office, retail, and industrial property market valuations in Europe seem to have settled and a new growth cycle is slowly beginning. This should be good news for property funds which are traditionally regarded as medium risk.

As for global equities, the view of the investment committee is that they are at the upper end of their historical valuation range. Global equities are trading at 19 x 2025 projected earnings vs an average of 16 x over the last 25 years. This has been driven by exceptional growth in global stock markets over the last two years of 20%+ per annum, which is highly unusual. A very large part of this growth has come from the US tech sector and the US market more generally. To put this in perspective, when I started in the investment business, the US market represented c. 30% of the global stock market capitalisation. It is now 70% of global markets. The value of Apple is now greater than the entire value of the Japanese market. Nvidia is bigger than the UK, French or Chinese market. The fate of the US tech sector in the coming years is crucial to the performance of most portfolios of Irish investors.

Despite our view that equity values are stretched, if global interest rates are falling and the US economy is thriving, there is no obvious catalyst for markets to reverse. As I write, out of the blue, DeepSeek appeared on the scene with its super-cheap AI process to challenge the US tech companies and the Trump administration, who are all ploughing billions into the next generation of US-manufactured AI products. As a result of this, Nvidia, the biggest AI chipmaker in the world, suffered the biggest single day valuation loss of any share in history at $600bn. Today, it is recovering as the market reinterprets the DeepSeek narrative in a more positive way.

That is radical uncertainty in play. So, what do we recommend for investors to navigate the next four years? First and foremost, we are making sure our clients rebalance their portfolios. One of the key principles of the Clinch investment philosophy is to focus on asset allocation rather than picking individual stocks. For most investors, the best way to achieve their goals in a cost-efficient way is to get the right blend of cash, government bonds, corporate bonds, real estate funds, global large cap equities, smaller company equities, emerging market equities, dividend-paying equities, and other asset classes.

The right mix of assets helps to achieve your growth targets while staying within your risk tolerance. Once you find the right balance, it is very important to maintain this within an acceptable range, or you may find yourself drifting into a different risk category. Without rebalancing, changes in your asset allocation are a mathematical inevitability over the medium term. It is bound to happen unless all the asset classes grow at the same rate, which is such a low likelihood as to be impossible in practical terms.

In 2024, as you will see from my colleague Donal Coughlan’s article in this newsletter, indexed global equities rose by 26% while government bonds rose by 1%. In 2023, equities rose by 12% more than government bonds. Because of this outperformance, the allocation to equities will have risen and the allocation to bonds will have fallen significantly. A 30% allocation to equities may have become a 45% allocation and a 15% allocation to government bonds may have become a 10% allocation within two years. This positive return from equities is very welcome, but left unchecked, it will inevitably lead to strategies drifting into a higher risk category with more equities and less bonds.

So, over the course of 2025 we will be contacting our clients to review their asset allocation and rebalance their strategy for this unsteady world.

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